Current Perspectives

U.K. Election ‘May’-hem

June 09, 2017

In April, U.K. Prime Minister, Theresa May called for a snap election three years ahead of the needed date. At the time, her Conservative party had a 20% lead in the polls and she wanted to consolidate power, grow an already-present majority, and gain an additional few years of potential negotiating time for Brexit. However, in an unfortunate British pattern, yet another Prime Minister has misjudged the public mood, calling for a vote that has ultimately swung badly against them. On the heels of last year’s surprise Brexit vote, the election held on Thursday June 8 has failed to deliver the expected majority for May’s Conservative party, resulting in a hung parliament.

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Eric Lascelles
Chief Economist
RBC Global Asset Management Inc.


Moody’s Downgrades Six Canadian Banks

May 12, 2017

On May 10, Moody’s, one of the major credit rating agencies, downgraded the six main Canadian banks by one notch. The downgrade was a reflection of concerns that the banks were “more vulnerable to downside risks in the Canadian economy,” as a result of expanding consumer debt levels and elevating housing prices.

The initial market reaction was mildly negative, with bond yields for the Canadian banks rising a few basis points, bank stocks falling between 0.5-2.5%, and the Canadian dollar weakening modestly. In light of these developments we’ve put together some thoughts on portfolio positioning and the Canadian market as we look forward.

  • The loonie weakened modestly on the news, largely as a reflection of the view that the Bank of Canada will be on hold for a prolonged period than the market initially suspected.
  • From a fixed income perspective, in the current environment where interest rates are low and employment remains stable, there is no evidence of credit deterioration from the big six banks.
  • Moody’s statements around growth in Canadian consumer debt levels and elevated housing prices are concerns we share. From an equity perspective, we monitor these risks on an ongoing basis to understand what the resulting impact of stress – like a rise in unemployment rates or increased interest rates – could be on Canadian consumer balance sheets and thus on the banks and their provisions for credit losses. While a downgrade like this doesn’t change how we think about investing in these securities, it does highlight the importance of ensuring that the portfolio is not overly concentrated in one area of the market – something we spend a lot of time thinking about.
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Krystyne Manzer, CFA
Portfolio Specialist
RBC Global Asset Management Inc.


Brexit: The Road to Exit

April 3, 2017

In 2016, British citizens voted in a historic referendum to exit the European Union (EU). On March 29, British Prime Minister Theresa May submitted a letter to the head of the European Council, officially triggering a two-year process of negotiations around the future of their trade relationship, the status of European residents who currently live in Britain (and vice versa), and the amount Britain will be required to pay to the EU in order to leave.

This article serves as a reference point and helps answer questions that may arise as the exit process grows more involved.

Highlights:

  • Britain will want to negotiate favourable trading terms, particularly as 45% of its exports go to the EU. Meanwhile, the EU is likely to bargain aggressively as the UK leaving the EU sets a very bad precedent for other countries that remain.
  • As Theresa May wrote in her letter, the UK is exiting the EU “but not Europe, and wants to remain committed partners and allies”.
  • The EU doesn’t want to punish Britain for this decision, but will want to draw a hard line that prevents the UK from receiving a better deal outside the EU than it received inside.
  • Much will depend on the years of negotiation that will now take place and the relationship that is subsequently established.
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Eric Lascelles
Chief Economist
RBC Global Asset Management Inc.

Krystyne Manzer, CFA
Portfolio Specialist
RBC Global Asset Management Inc.


A Sleepy Budget for Busy Times

March 22, 2017

No one thought that Canada’s 2017 budget would match the punch of the 2016 edition given that the latter was the product of a newly minted Liberal government looking to put its mark on fiscal policy after a decade in the wilderness. Still, the 2017 budget is surprising in how little it delivers.

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Eric Lascelles
Chief Economist
RBC Global Asset Management Inc.


Breaking Down Bonds in a Low Rate Environment

February 2017

Over the past few years, we’ve heard a lot in the financial press about the possibility of rising interest rates and the negative consequences this would have on bond portfolios. Given the extent of recent yield increases and resultant decline in bond values, investors understandably feel uneasy about the prospect of further yield increases in the months ahead. However, as we will illustrate, should yields continue to rise – which is far from a certainty – the implications for fixed-income investments are more favourable than they appear.

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U.S. Protectionism: Effects on Canada

January 30, 2017

Trump’s inaugural address and his actions during his first days in office reiterated his vision for more protectionist policies to help U.S. workers gain an advantage. Whether this is done through tariffs or renegotiating provisions surrounding existing trade deals like NAFTA, Trump has considerable leeway to act.

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Eric Lascelles
Chief Economist
RBC Global Asset Management Inc.


The Second Rate Hike is Here, Now What?

December 14, 2016

For those who have been watching monetary policy closely over the last several years, the U.S. Federal Reserve’s (Fed’s) decision to hike the federal funds rate by 0.25% on December 14, 2016 might feel like déjà vu. In a move that was widely predicted, this hike brings the fed funds rate into a range of 0.50%-0.75%.

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Eric Lascelles
Chief Economist
RBC Global Asset Management Inc.

Resources


A Consequential Vote for Change

November 9, 2016

After a divisive and highly publicized election campaign, Donald Trump has been chosen to be the 45th President of the United States.

In this summary, RBC Global Asset Management’s Chief Economist Eric Lascelles, discusses what the outcome may mean for the U.S. economy, fiscal policy and financial markets.

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Eric Lascelles
Chief Economist
RBC Global Asset Management Inc.

Krystyne Manzer, CFA
Portfolio Specialist
RBC Global Asset Management Inc.

Resources

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